Volvo 2007 Annual Report Download - page 128
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124 Financial information 2007
Notes to consolidated fi nancial statements
Currency risks
The content of the reported balance sheet may be affected by changes
in different exchange rates. Currency risks in Volvo’s operations are
related to changes in the value of contracted and expected future
payment fl ows (commercial currency exposure), changes in the value
of loans and investments (fi nancial currency exposure) and changes
in the value of assets and liabilities in foreign subsidiaries (currency
exposure of shareholders’ equity). The aim of Volvo’s currency-risk
management is to minimize, over the short term, negative effects on
Volvo’s earnings and fi nancial position stemming from exchange-rate
changes.
Commercial currency exposure
In order to hedge the value of future payment fl ows in foreign curren-
cies, Volvo uses forward contracts and currency options. The Group’s
currency policy has been changed, effective 2007. For each currency,
75% of the forecast net fl ows for the coming six months are hedged
and 50% for months seven to 12, while contracted fl ows after 12
months shall normally be hedged. The former Group’s currency policy,
for each currency, 50–80% of the forecast net fl ow in the next six
months was hedged and 30–60% for months seven to 12, and con-
tracted fl ows after 12 months should normally be hedged.
The nominal amount of all outstanding forward and option con-
tracts amounted to SEK 63.1 bn (57.2) at December 31, 2007. On the
same date, the fair value of these contracts was positive in an amount
of 266 (764).
The table below presents the effect a change of the value of the
Swedish krona in relation to other currencies would have on the fair
value of outstanding contracts. In reality, currencies usually do not
change in the same direction at any given time, so the actual effect of
exchange-rate changes may differ from the below sensitivity analysis.
Change in value of SEK in relation to Fair value of
all foreign currencies, % outstanding contracts
(10) (4.443)
0 266
10 4.975
Financial currency exposure
Loans and investments in the Group’s subsidiaries are done mainly
through Volvo Treasury in local currencies, which minimizes individual
companies’ fi nancial currency exposure. Volvo Treasury uses various
derivatives, in order to facilitate lending and borrowing in different cur-
rencies without increase the company’s own risk. The fi nancial net
position of the Volvo Group is affected by exchange rate fl uctuations,
since fi nancial assets and liabilities are distributed among Group
companies that conduct their operations in different currencies.
Currency exposure of shareholders’ equity
The consolidated value of assets and liabilities in foreign subsidiaries
is affected by current exchange rates in conjunction with translation of
assets and liabilities to Swedish kronor. To minimize currency expos-
ure of shareholders’ capital, the size of shareholders’ equity in foreign
subsidiaries is continuously optimized with respect to commercial and
legal conditions. Currency hedging of shareholders’ equity may occur
in cases where a foreign subsidiary is considered overcapitalized. Net
assets in foreign subsidiaries and associated companies amounted at
year-end 2007 to SEK 61.1 billion (43.6). Of this amount, SEK 3.8
billion (3.6) was currency-hedged through loans in foreign currencies.
Out of the loans used as hedging instruments SEK 2.9 billion are due
in 2010 and the remaining SEK 0.9 billion in 2011. The need to under-
take currency hedging relating to investments in associated com-
panies and other companies is assessed on a case-by-case basis.
Credit risks
Volvo’s credit provision is steered by Group-wide policies and custom-
er-classifi cation rules. The credit portfolio should contain a sound
distribution among different customer categories and industries. The
credit risks are managed through active credit monitoring, follow-up
routines and, where applicable, product reclamation. Moreover, regu-
lar monitoring ensures that the necessary provisions are made for
doubtful receivables. In the tables below, ageing analyses are pre-
sented of accounts receivables overdues and customer fi nance
receivables overdue in relation to the reserves made. It is not unusual
that a receivable is settled a couple of days after due date, which
affects the extent of the age interval 1–30 days.
The credit portfolio of Volvo’s customer-fi nancing operations
amounted at December 31, 2007, to approximately SEK 79 billion
(65) in the Volvo group1. The credit risk of this portfolio is distributed
over a large number of retail customers and dealers. Collaterals are
provided in the form of the fi nanced products. Credit provision aims for
a balance between risk exposure and expected yield. The Volvo
Group’s fi nancial assets are largely managed by Volvo Treasury and
invested in the money and capital markets. All investments must meet
the requirements of low credit risk and high liquidity. According to
Volvo’s credit policy, counterparties for investments and derivative
transactions should have a rating of A or better from one of the well-
established credit rating institutions.
The use of derivatives involves a counterparty risk, in that a poten-
tial gain will not be realized if the counterparty fails to fulfi ll its part of
the contract. To reduce the exposure, master netting agreements are
signed, wherever possible, with the counterparty in question. Counter-
party risk exposure for futures contracts is limited through daily or
monthly cash transfers corresponding to the value change of open
contracts. The estimated gross exposure to counterparty risk relating
to futures, interest-rate swaps and interest-rate forward contracts,
options and commodities contracts amounted at December 31, 2007,
to 3,424 (1,158), 2,527 (2,621), 48 (78) and 113 (25).
Credit portfolio – Accounts receivables and Customer fi nancing
receivables
Accounts receivables 2006 2007
Account receivables gross 24,190 31,427
Valuation allowance for doubtful
accounts receivables (939) (923)
Accounts receivables net 23,251 30,504
For details regarding the accounts receivables and the valuation for
doubtful accounts receivables, refer to Note 20.
Customer fi nancing receivables 2006 2007
Customer fi nancing receivables gross 66,172 80,210
Valuation allowance for doubtful
customer fi nancing receivables (1,430) (1,363)
Customer fi nancing receivables net 64,742 78,847
1 In accordance with IAS 14 Segment Reporting, operational leasing contracts are reclassifi ed to fi nancial leasing contracts in the segment reporting of Customer
Finance, which constitutes the difference between the portfolio value reported in the segment reporting and the portfolio value reported in the Volvo group. See
Note 1 Accounting principles for details regarding the accounting treatment.